MarketView for May 17

Summary  

After being in negative territory for much of the day, the major equity indexes recovered shortly prior to the closing bell as bargain hunters snapped up beaten-down shares, setting aside concerns that efforts to tackle the euro-zone debt crisis could stifle the global economy.

Wal-Mart and Target closed higher ahead of their respective earnings announcements that are due out later in the week. Wal-Mart, is expected to show an increase in earnings over the same period a year ago, while at the same time giving up some market share, mostly to Target. Shares of Wal-Mart ended the day up 1.2 percent to close at $52.73, while Target closed up 1.6 percent at $56.05.

The euro fell to a four-year low prior to a small rebound a move that did little to help the attitudes on the Street as traders and investors remained concerned over actions that some euro-zone nations are taking to reduce their budgets as those moves could also cut their economic growth and then subsequently that of the United States.

Adding to the day’s concerns over the still a fragile economic rebound, a report from New York State indicated that growth advanced at a slower pace in May, while a Chinese leading economic indicator indicated that China’s growth may have peaked.

Demand worries hit commodities, including oil, which settled down $1.53 per barrel, at $70.08. Energy companies were the S&P 500's biggest laggards with Exxon Mobil down 0.5 percent at $63.27. Freeport-McMoRan Copper & Gold fell 2.5 percent to close at $67.97, as copper prices fell 5.6 percent.

Shares of manufacturer Caterpillar (CAT.N), down 1.7 percent at $63.78, weighed on the Dow.

Shares of Lowe's fell 3.1 percent to $25.26 after the home improvement chain offered up a disappointing profit forecast for the year. At the same time, home-builder sentiment increased in May to the highest level in more than two years.

Economic Rebound Slowing

The pace of the economic recovery may be slowing a bit. The New York Federal Reserve said its gauge of manufacturing in New York State indicated that the pace of economic growth slowed in May, although the jobs index component rose to its highest level in about six years. At the same time, the New York Fed's "Empire State" general business conditions index fell to 19.11 in May from 31.86 in April. Readings of more than zero show growth. The index has now pointed to economic expansion for 10 straight months. 

A disappointing profit forecast by Lowe's also clouded the recovery outlook, and the company's chief executive was cautious about an economic recovery. At the same time a rise in homebuilder sentiment reached the highest level in more than two years, indicating that there is evidence that the housing industry is improving after a long slide, despite a three-year tumble in prices.

Home-builder sentiment rose in May to the highest level in more than 2-1/2 years, helped out by a home buyer tax credit, the National Association of Home Builders said on Monday. The NAHB/Wells Fargo Housing Market index increased three points to 22, the highest since August 2007, the group said in a statement.

It was the second straight month of gains for that index. Overall sentiment, however, remained negative, with a reading below 50 indicating more builders view sales conditions as poor than good. NAHB chief economist David Crowe said tight access to credit, competition from short sales and foreclosures were major obstacles on the path to a healthier housing market.

The turmoil in European debt markets has caused many to delay their forecasts of when the Federal Reserve will start raising interest rates. Six weeks ago a majority of the big banks that deal directly with the Fed thought the Fed would raise interest rates before the end of this year. By last week, most predicted the first hike would come in 2011.

The dollar is continuing to strengthen and for now, there are some benefits from a growing appetite for dollar-denominated assets stoked by concerns regarding European debt. Foreign buying of Treasuries is on the rise, which is helping to keep yields low and borrowing costs cheap for the U.S. government and consumers.

Data released on Monday indicated that foreign investors set a record for purchases of long-term U.S. securities in March, snapping up $140.5 billion and shattering a previous peak hit in 2007, the Treasury Department said on Monday. At the same time, borrowing costs remain relatively low, while there is continuing evidence that Americans are managing their debts more tightly, perhaps helped by improvements in the economy. As a result, credit card delinquencies fell for the fourth straight month in April, the latest indicator that Americans are recovering from the worst economic downturn since the Great Depression.

Treasury Department Sees Record Capital Inflow

Foreigners purchased a record $140.5 billion of long-term Treasury securities in March, the Treasury Department said on Monday, and more than doubled purchases of government bonds. China remained the largest holder of Treasury debt and added to its holdings for the first time in seven months. Net Treasury purchases by all foreign investors jumped by $108.47 billion in March from $48.1 billion in February.

March's net long-term inflow was roughly three times the $47.1 billion inflow in February and shattered a previous record set in May 2007. The Treasury began compiling the data in the 1930s. It is likely that some of the Treasuries buying may have been driven by concerns over Greece's debt crisis and fear of exposure to the euro.

Demand for dollar denominated assets was particularly broad in March, with foreigners snapping up $16 billion in corporate debt, snapping a nine-month streak of net selling. U.S. agency debt purchases spiked to $21.9 billion from $2.4 billion.

China bought $17.7 billion worth of U.S. government debt in March, swelling its total holdings to $895.2 billion. It was the first time China added to its Treasury stash since September. Japan remained in second place with $784.9 billion, up from $768.5 billion in February.

The euro has lost more than 13 percent against the dollar so far this year, hitting a four-year low at below $1.23 on Monday.

Overall inflows, which include short-term securities such as Treasury bills, also rose in March, with foreigners buying a net $10.5 billion, compared with an upwardly revised $9.7 billion inflow the prior month. Domestic bank owned dollar-denominated liabilities to foreign residents also decreased sharply, by $123.8 billion. Analysts said that could be partly tied to dollar-demand from investors in Europe.